Tuesday, July 26, 2011

U. S. Corporate Profits are being earned "off shore"

Recently I have written about how the Fed’s injection of funds into the banking system has gone over seas because that is where the profits are.  See “Federal Reserve Money Continues to Go Offshore,” http://seekingalpha.com/article/276909-federal-reserve-money-continues-to-go-offshore. 

Now we are getting more and more information that non-financial resources are also going offshore because that is where manufacturing profits are as well.  See the Wall Street Journal article “Business Abroad Drives U. S. Profits,” http://professional.wsj.com/article/SB10001424053111904772304576466003840674770.html?mod=ITP_marketplace_0&mg=reno-wsj.

“A third of the way through the second-quarter reporting season, earnings at companies in the Standard & Poor’s 500–stock index are the highest in four years…”

“Corporate profits—one of the few areas of strength in the limp U. S recovery—appear to be weathering the economy’s soft patch.  But the gains in many cases have come from international operations, particularly in emerging markets.”

Companies conforming to this pattern include Air Products & Chemicals, United Technologies Corp., Hasbro Inc., McDonald’s Corp. and General Electric Co. among others.

While American consumers and small- to medium-sized businesses fight through a period of debt deflation trying desperately to get their balance sheets under control (http://seekingalpha.com/article/279283-credit-inflation-or-debt-deflation) larger American corporations seem to be doing just fine, thank you, in international markets. 

It seems as if about half of the monies these corporations are spending on capital investment is going into other countries.  That is where the sales are so that is where the funds are going.

Also, the investment that is being done in the United States is going more to increase productivity and lower costs than it is to expand employment and generate further economic activity. 

In terms of aggregate figures, the article reports that “U. S. multinational corporations cut their work forces at home by 2.9 million during the 2000s while increasing them overseas by 2.4 million, according to data from the U. S. Commerce Department.” 

In contrast to the slow-growing United States economy, companies found substantial purchasing strength elsewhere.  General Electric, for example, said it experienced double-digit revenue growth in each of its international divisions in the second quarter.  The largest growth came in India, registering a 91 percent gain; in China, revenues rose by 35 percent and orders increased by 80 percent. 

This is what happens when capital can flow freely around the globe. 

Money will follow opportunity.

The United States prospered through the last fifty years of credit inflation because it had the reserve currency of the world.  Others were willing to take on United States debt because the world still traded in U. S. dollars. 

But, this credit inflation did two things.  First, it eroded the productive ability of the United States. See my post “Why This Economic Expansion is Going Nowhere,” http://seekingalpha.com/article/279928-why-this-economic-expansion-is-going-nowhere.

Second, it resulted in a build up of consumer debt and business debt that was unsustainable and had to be reduced.  The reduction of this is the debt deflation the United States is now experiencing. 

The government’s attempts to push further credit inflation on the economy is just pushing money out into the rest-of-the- world, as reported in some of my posts mentioned above, and has created economic growth…and profits…elsewhere.

In a world of freely flowing capital, a nation cannot just conduct its economic policy independently of the rest of the world.  As stated above, the United States got away with it for a long period of time because it had the reserve currency of the world.  But, this lack of discipline has caught up with us and more and more the statistics are supporting this conclusion.

The other thing the credit inflation policies of the United States government has done is to skew the income/wealth distribution in America toward the wealthy.  Small- and medium-sized business are not profiting from the current efforts to stimulate the economy.  However, as reported, the larger, wealthier companies are doing very, very well. 

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